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Bond yields, swap rates jump

Traders wait for borrowing plan in Budget

Business Standard 

Government bond yields and overnight indexed swap (OIS) rates soared after the Reserve Bank of India kept repo rate unchanged at 8.5 per cent at its mid-quarter policy review announced on Thursday.

Yields on the 10-year benchmark government bond jumped 12 basis points (bps) to 8.38 per cent soon after the policy announcement, but eased marginally in the later part of the trading session. Yields closed on Thursday at 8.36 per cent, eight bps higher from the close of 8.28 per cent on Wednesday.

“There is sign of disappointment on RBI not getting into the rate cut mode,” said Moses Harding, head-economic and market research at IndusInd Bank. He said he expects the yields to shift into the 8.25-8.50 per cent range.

OIS rates also inched up by 10-12 bps after the policy announcement. Three-month OIS rates closed at 8.65 per cent, 10 bps higher than the previous close. The one-year OIS rates rose 11 bps to 8.17 per cent in the same period.

Market participants said yields might edge up if government’s borrowing plan for the next financial year is higher than the amount raised in 2011-12. So far the government has borrowed Rs 5.1 lakh crore via sale of dated securities in the current financial year. “We expect close to 90 per cent of the fiscal deficit (5.1 per cent of GDP) to be financed by market borrowings,” said economists at Nomura in a note.

A bond dealer with a public sector bank said: “Even if the government pegs a lower borrowing plan, traders will be cautious, as the target was twice revised upwards this year.”

For 2011-12, the government had set the gross borrowing target at Rs 4.17 lakh crore against Rs 4.37 lakh crore raised in the previous year.

Citing liquidity tightness, the central bank had announced an inter-meeting reduction of 75 bps in the cash reserve ratio last week.

A section of markets was expecting reduction in policy rates to follow in the mid-quarter policy review.

However, RBI decided to extend the pause on concerns of upward risk in inflation and unlikely fiscal consolidation.

The central bank said in the statement that future actions will be towards lowering the rates.

RBI is slated to announce the annual monetary and credit policy for next financial year on April 17.

Liquidity deficit continues to be double of RBI’s comfort level of Rs 60,000 crore despite infusion of around Rs 80,000 crore via two successive cuts in cash reserve ratio since January-end. RBI also infused over Rs 1 lakh crore through open market operations in the second half of the current financial year. “The liquidity situation has since improved and it is expected to ease further in the weeks ahead,” the central bank said in the mid-quarter policy review statement.

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First Published: Fri, March 16 2012. 00:35 IST